Tax Increase or Wage Increase?

One of the putative benefits of the excise tax on high-cost insurance plans is that those who are subject to it will perceive it not as a tax increase, but as a wage increase. The mechanism by which it is actually supposed to raise money is not by collecting taxes on people who receive lavish health benefits. Rather, the idea is that employers will cut benefits, pass on the savings to their workers in the form of wages, and the employees, in turn, will pay more in taxes than they otherwise would have.

The thing's completely unfalsifiable, of course. And I've had at least one expert express worry that this ceiling could ultimately become a floor--that employers will get used to holding their benefits right under the level at which the excise tax comes in, even if there are secular declines in health care costs. But the theory behind it is basically sound.

So the question is, how do workers experience this? Are they happy because their wages get a boost, or sad because their health benefits get cut?

It depends on whether you think people value the health benefits they get at approximately what it costs their employers. I am the last person to see corporate HR departments as fonts of all-wise administrative efficiency. On the other hand, a lot of these policies are held by union workers, whose memberships all know pretty well exactly the tradeoffs they are making between pay and benefits. Because they have collective bargaining every few years, they are well aware that they have to give up wages to get health care. The fact is that though health care wonks may deplore it, people love to be insulated from even the most trivial health care costs.

The other thing to consider is that even if people don't value their health benefits at the full cost of the policy, the income tax means they lose 20-40% of every dollar that is taken out of health benefits and passed on in the form of wages. So what people are likely to see is a fairly substantial benefit cut, and a fairly small wage increase.

Democrats are betting that they'll focus on the wage increase. I'm not so sure.

We want to hear what you think about this article. Submit a letter to the editor or write to letters@theatlantic.com.